UK Deficit Reduction

In February 2010, 20 Economists wrote to the British Chancellor to urge a speedier deficit reduction. The New Statesman followed them up for an article recently to ask if their views have changed. The responses are interesting.

24 thoughts on “UK Deficit Reduction”

  1. Some of the tune-changes carry big qualifications (its not that I was wrong – its that circumstances have changed etc).

    Interesting read, Britain’s record low interest rates aren’t attributed to monetary policy often enough in the media.

  2. Definition of ‘Hubris’

    The characteristic of excessive confidence or arrogance, which leads a person to believe that he or she may do no wrong. The overwhelming pride caused by hubris is often considered a flaw in character. While these hubris feelings are often justified, they often cause irrational and harmful behavior.

  3. Pissarides said

    Keynesianism of the kind that guided policy after the Second World War no longer works, but [… the] problem with a recession is that it punishes a relatively small number of people and it punishes them a great deal. The unemployed, new school leavers and ethnic minorities bear the brunt of it. The cost of recession to them is not only lower income, but loss of self-esteem, loss of skill and damaged future career paths.

    I know researchers of labour search are more likely than most to care about distributions, but it’s interesting to hear Pissarides frame the usefulness of Keynesianism in terms of avoiding undesirable (heterogenous) effects on agents. In doing so, he pushes the debate away from the magnitude of the multiplier. (I do not know if this is good or not, but it is interesting.)

  4. Ho hum. How very 1980s. Politician in disastrous cuts to capital spending while attempting to maintain unsustainable current spending shocker… now where have we seen that before? And again? And again?

  5. Ho hum indeed. Its their utterly dopey economic Model-in-Use. You cannot (like you really cannot) crank up a physical system on a geometric basis. But you can do this with credit. Debt emerges and it does increase geometrically. When will these chumps get a grip on reality? Never it seems. So we are stuck with this mess until some politician has the testicles to force all debts to zero. This won’t cure our problems. It will just prevent them from worsening.

    “Ah go on! Have another bond!”

  6. HAMLET Do you see yonder cloud that’s almost in shape of a camel?

    POLONIUS By the mass, and ’tis like a camel, indeed.

    HAMLET Methinks it is like a weasel.

    POLONIUS It is backed like a weasel.

    HAMLET Or like a whale?

    POLONIUS Very like a whale.

    HAMLET …They fool me to the top of my bent. …

  7. It should be noted that the IMF was singing the same tune as those economists in 2010.

    Remember a briefing by academics at the London School of Economics on the turmoil on the international markets, when the Queen asked: “Why did nobody notice it?”

    Professor Luis Garicano, director of research at the LSE, had explained the origins and effects of the credit crisis when she opened the £71 million New Academic Building in Nov 2008.

    Prof Garicano said: “She was asking me if these things were so large how come everyone missed it.” He told the Queen: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”

    Six months later, a group of economists wrote to the Queen and blamed “a failure of the collective imagination of many bright people.”

    There was a “psychology of denial” that gripped the financial and political world in the run-up to the crisis. Despite these yawning imbalances, they say, “financial wizards” managed to convince themselves and the world’s politicians that they had found clever ways to spread risk throughout financial markets – whereas “it is difficult to recall a greater example of wishful thinking combined with hubris”.

    “Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well,” they said. “The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction.”

    The crisis has simply revealed that many smart people, are also dumb.

    An engrained collective view, which is sometimes called ‘culture’ that over time transmutes into a myth, is hard to sail against.

    For example, the bright people who run the tech and VC firms in Silicon Valley, likely genuinely believe that their acclaimed tech cluster is a meritocracy. Some of them are Obama supporters.

    However, racial and gender discrimination is higher than in the national tech work force while federal government data shows that it has got worse over the past decade.

  8. Freada Kapor Klein, a venture partner at Kapor Capital, who is also the founder of the advocacy group, Level Playing Field Institute, has said on the need to fight conformity that “ideas for startups born of different lived experience, new approaches to problem-solving and managing — can only be achieved if we loosen the grip of the belief that there is one best way to run a meeting or run a company. Similarly, the belief that there is a clear best qualified candidate for every job holds a grain of truth but also leaves room for bucketfuls of hidden biases.”

  9. The responses are interesting and the economists in question are to be commended for revising their views. However, this highlights once again what Krugman has term the failure of economics and economists in the crisis.

    It seems to me that most economists have spent their careers focusing on very technical and arcane matters while forgetting the major principles of the discipline that were learned during the Great Depression. Moreover, the very fact economists have spent so much time on technical matters, seems to have clouded their judgement – almost as Keynes/Hicks is not modern enough to be relevant.

    The more I read about (macro)economics the more I realise that it is really just a sub-field of history. The models used by economists can be useful abstractions to help explain what happened in the past, but that is all. Extrapolating into the future the results of models devised to describe specific events in history is fraut with error and no more useful that trying to apply the lessons of political or military history.

  10. What did JK Galbraith say about economics and astrology?

    My impression is that most folk do not learn from their ‘mistakes’ (apart from falling off a ladder!). Why would you correct something you ‘know’ was ‘right’ (its why you did it in the first place!) and do the opposite. That would be irrational! And we cannot have that, now can we?

    Folk who do learn and do make the intellectual effort to re-adjust are shunned. Why?

  11. @Brian Woods Snr
    “My impression is that most folk do not learn from their ‘mistakes’ (apart from falling off a ladder!)”.

    How right you are.
    Of course the fact that the advisers were not standing on the ladder, when they advised cutting off a few rungs to lighten the load, made it far easier to give such advise. Now that the whole ladder appears ready to collapse, with some casualties amongst the onlooking structural economists ,perhaps a little more thought is going into the process.

  12. http://www.telegraph.co.uk/finance/financialcrisis/9480990/Finland-prepares-for-break-up-of-eurozone.html

    “The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.”

    Fiscal union by stealth is precisely what I am concerned about for Ireland – the Irish people may well decide that Fiscal Union is fine by them but that is something that needs to be put to them – we are undoubtedly moving down this road as it is the only possible way to save the euro – but we must be allowed to decide if that the euro is worth saving based on this conditionality.

  13. @MH

    You post at 6:13 is very apt.

    Not seeing the bigger picture and understanding very odd things i.e. outliers can have a devastating impact on investments, business operations, Govts etc. Doing one’s job but not lifting one’s head to see the wider issues is oh so common in every aspect of life. This has been studied by researchers for many years and a super example of this is in the followng experiment which is often quoted which goes as follows:

    Participants in the study are asked to count the number of passes the team wearing white make in a minute of a recorded basketball footage with the opposing team wearing black. During the footage a man dressed as a gorilla i.e. wearing a black garment etc comes into view and beats his chest gorilla style and walks off again.

    When those who participated in the study were asked how many passes the team in white made nearly all suggested the number was between 14-17. When the same participants wers asked did they notice anything unusal happen in the footage – an incredible 60% said they saw nothing unusual or out of keeping with a basketball match on screen. When the video was rescreened those in the 60% category indicated that the researchers had switched the tape as they simply couldn’d believe they missed something so odd and weird in the original screening…

    60% is a big number. Put simply we don’t expect to see what what we are not looking for and we get cought up in the detail and generally miss the bigger issues. Sad but true.

  14. @YorB
    It worries me that this is exactly what is happneing here in Ireland too.

    While the govt congratulates itself everytime there is some new job announcements or troika gives them another pass grade – is there anyone looking at the relatively high prospect of a euro break up and what our contingencies for that may be. While I appreciate they may want to keep any such contingencies under wraps, it woudl be paramount to treason not be catering for the possibility at this stage. There is absolutely no one that can now say we didn’t in our wildest dreams see the possibility that the euro could break up….but where would your money be in relation to the current administration – do they notice the gorilla or are they simply counting the number of gold stars they are getting from the troika

  15. but the economists were right, they always are!!! please, people, catch up! first, the problem in 08 was NOT because economists got it wrong, it is because the world refused to toe the line. If we don’t undertsand this, how can we hope to fix the problem. And austerity was needed to maintain the confidence of the market, but now that the market looks like it won’t do well under austerity, we must change our minds because the world has changed.

    Now all we need to get back on track is the set interest rates to zero and write yet another US$600tn + or 10x global GDP of derivatives contracts that end up transferring risk from the banking system to errrrrmmmmmm (?) …..

    and on Fiscal policy never mind trying to tax the “value creators”, some cynics argue that they are the problem, but they aren’t! they are the solution!!! Government should manipulate interest rate markets because the free market of capitalism demands a free market! and when there are losses, it is not right to allow the market absorb them, because that would distort the free functioning of the market. And as I’m sure you all know, if we don’t have a free market, all you’ve got is communism!!

  16. Hi Brian Woods
    I’m interested, as a layman, in what you’ve had to say about your ‘model in use’, is there any chance I could ask you to expand a little on it. I saw elsewhere you described it as ‘sustainability’, as opposed to permagrowth, what exactly do you mean by that? How do you model it? Make it politically viable? And what do you mean by cutting ‘all debts to zero’, what would this accomplish and how could it be achieved (Is it a long term suggestion to maintain all debts globally at zero)? Any reading suggestions? Apologies for going of topic

  17. We should be listening to economists who have extensively studied currency/financial/real estate crises. Krugman has great research on currency crises. There are many of those kind of people in Japan. Just like in the boom there are many ecomists out there claiming to be experts who have done close to zero research in those areas. Has the Irish government sent a team to Japan yet to learn from their experience?
    Economist on Japan.
    http://www.economist.com/node/21559952

  18. @rf:

    Permagrowth is an annual geometric increase in aggregate economic output (over the long term). I believe that it is the implicit economic Model-in-Use by economists. Its what they refer to as ‘growth’. This upward-sloping trend-line (of aggregate activity) is necessary if people want any improvement in their standards of living or even a pension. Since Permagrowth is a mathematical construct it simply can go on and on and on! Its standard fare in undergrad texts (look for an upward sloping trend-line).

    One big drawback (with very little mention in the ‘mainstream’ undergrad economic syllabi) is that our economic systems are embedded in a physical world. The laws of science prohibit any sort or geometric ‘growth’ in a physical system with finite resources- other than for short intervals, then the system will ‘collapse’ over Seneca’s Cliff. It may or may not re-set and start up again, provided the levels of waste products are low. Physical systems usually work OK if their annual increase in output is arithmetic (Sustainability).

    If you are a mainstream economist and your intellectual mindset (your belief system or Model-in-Use) is postulating specific outcomes based on a Permagrowth paradigm – your cooked! All the so-called laws of economics (there may be one or two exceptions) are based on logical virtual axioms of math – they work wonderfully well. Just not in a real physical world.

    When economists go out into the real world – like investigative scientists, they come back with some sorry tales. The real data they gather contradicts economic laws and rules.

    True Sustainability is a continuous, small, annual decrement in aggregate economic activity until you reach the ‘carrying capacity’ of your ecosystem. Clearly this is unacceptable to lots of folk so no one will go there. But nature will force us to go there. The Limits to Growth are not a clearly demarcated boundary. You can stray quite a long way before things get rough – fast and bad.

    Politically viable? Not a chance this side of hell! Ask the Easter Islander’s.

    A Debt Jubillee cancels ALL debts. No one owes nothing. It like cutting all power to your PC – it crashes, then you do a cold-boot. You lose all unsaved data! Big problem with this is Locke. He opined about private property and this has metamorphosed into an anality about debt (its MY money, and I want it BACK!). Fine, but what happens when the debtor is busted? Our Permagrowthists will chant their mantra: Growth! Growth! and more Growth! Because that’s the only way one gets ones money back.

    Quick question: If I conjure up money (like from nothing) can I actually lay claim to it as private property? Hmmmm

    So, we have hit the inflection point on our growth curve and its tipping over!

    Must have SOME debt – but if debt aggregates geometrically, then how will folk pay it off using an arithmethic system? They can’t!

    Frederick Soddy (Wealth Virtual Wealth and Debt) – availability???

    Paul Samuelson (Economics) – his 1948 undergraduate textbook.

    Meadows, Randers and Meadows (Limits to Growth: the 30 year update)

    Nicholas Georgescu-Roegen (The Entropy Law and the Economic Process) – this is an academic text.

    JK Galbraith (A History of Economics) – cracking stuff!

    Giovanni Arrighi (The Long 20th Century) – holiday reading!Ayres and Warr (The Economic Growyh Engine) – an academic text.

  19. Thanks for the response Brian Woods, that Soddy book looks interesting- although there dont seem to be many copies going around.
    Anyone interested though, its available online free as an ebook, not sure if Im allowed link to it, but google name etc and it comes up.

  20. Not to row against the Keynesian current here but:

    There is never a good time to make spending cuts, either politically or economically.

    Sure, the multiplier exists and it means cuts hurt growth in the short term. But this is true at every point in the business cycle. Cuts during the boom hurt the ability of genuinely productive firms to “make hay”; while failing to make cuts during a recession means inefficient firms are not fully exposed to the purge factors that will improve sectoral efficiencies across the economy.

    Investment by the government should be targeted only at market failures, irrespective of cyclical conditions (since a good investment has a positive capitalisation rate no matter where in the cycle it takes place).

    Since market failures are often hard to identify and usually carry benefits marginally net positive to the deadweight cost of public inefficiency, policymakers should employ caution, even in seemingly no-brainer schemes like roads, bridges and airports.

  21. @ Chris C:

    Perhaps I should point out to you that we left Mr Keynes and other orthodox economists at the 1970 Station. What replaced them were some very talkative and persuasive ponzi salesmen (they were selling ‘free-market credit)’. And they succeded. What we have now is a global social experiment gone very badly wrong. Mind you, there have been plenty of warnings. And at least three near-misses.

    No further emission of credit and cash money – by anyone, state or financial will cure our debt problem. What we need is a massive write-off and write-down of all existing debts and a moratorium on any future increase in interest-bearing ‘borrowings’ until we reach a stage (if ever) where the income of the state (from all taxes) is exactly matched by the total expenditure of the state. If anyone proposes anything other than this they are either a fool or a knave biding for time to ensure they can garner sufficient funds for themselves.

    Clearly the necessity to ensure balanced budgets is totally unacceptable (politically) so it will not happen. But it will – just not by choice.

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